Choosing investment strategies

Peer-to-Peer Lending Platforms: Understanding Investor Risk Profiles

This blog post discusses two types of investments: NZ peer-to-peer lending and NZ property-backed investment funds. It explains how they work, their strengths and weaknesses, and the risks and potential returns associated with them. The article also covers how to assess your risk profile as an investor and make informed investment decisions that align with your financial goals.

Finally, the post introduces Norfolk Mortgage Trust as an alternative to peer-to-peer lending platforms, highlighting the role of diversification, professional borrower evaluation, and active loan management in managing risk and delivering consistency and stability of monthly returns for investors.

Understanding Peer-to-Peer Lending

How Peer-to-Peer Lending Works

Peer-to-peer lending platforms like Harmony, Squirrel, Zagga connect borrowers and investors in an online marketplace. Borrowers request loans, and investors provide funds to fulfill these requests. The platform acts as an intermediary, facilitating transactions and managing associated processes.

Key Players and Their Roles

Peer-to-peer lending involves three key players: borrowers, investors, and the platform. Borrowers are individuals or businesses seeking loans, while investors are individuals or institutions looking to lend money and earn returns. The platform provides the infrastructure and framework for the lending process.

Strengths & Weaknesses of Peer-to-Peer Lending

Peer-to-peer lending has advantages and disadvantages for both borrowers and investors. Borrowers benefit from easier access to loans, a streamlined application process, and potentially lower interest rates. However, they may also face stricter eligibility criteria and limited loan amounts.

Investors, on the other hand, have the opportunity for potentially higher returns compared to traditional investments and direct control over investment decisions. Investors in peer-to-peer lending must assess risk based on limited information, and their investment money is often secured by shares in a single property. As a result, investors should carefully consider the potential risks associated with these investments, including the possibility of defaulting borrowers, platform instability, and market volatility.

Investor Risk Profile in Peer-to-Peer Lending

Comparing risk profiles in peer-to-peer lending and property-backed investment funds like Norfolk Mortgage Trust provides insights into the varying degrees of risk and potential returns. Several factors influence an investor’s risk profile in peer-to-peer lending:

  • Creditworthiness and Risk Assessment of Borrowers: Evaluating borrowers’ creditworthiness and the risk associated with their ability to repay the loans is crucial.
  • Diversification and Portfolio Management: Diversifying investments among multiple borrowers, property types, and geographic locations helps to reduce risks and maximise returns.
  • Platform Risk and Investor Protection Measures: Assessing the platform’s credibility, security measures, and mechanisms for investor protection is essential.
  • Market Conditions and Economic Factors: External factors like economic stability, interest rates, and industry trends impact the risk and potential returns.

Investors in peer-to-peer lending must assess risk based on limited information, usually secured by shares in a single property only.

Risk vs. Return in Peer-to-Peer Lending

To make informed investment decisions, it’s important to examine the trade-off between risk and return in peer-to-peer lending. Understanding the potential returns and associated risks helps investors gauge whether the investment aligns with their risk tolerance and financial objectives. Thorough due diligence, risk assessment, and ongoing monitoring are crucial steps in managing risk in peer-to-peer investment.

Norfolk Mortgage Trust: A Securely Actively Managed Alternative

Norfolk Mortgage Trust offers investors an alternative investment option that involves lower-risk exposure when compared to peer-to-peer lending platforms. To achieve this, Norfolk employs conservative lending practices that are designed to reduce risk while providing stable returns. Norfolk professionally manages loans and maintains a diverse portfolio of property-backed assets on behalf of their investors.

Key features of Norfolk Mortgage Trust include:

  • A rigorous evaluation of each borrower’s financial position
  • Active loan management that goes beyond superficial checks
  • A wealth of lending experience across the organisation
  • A diverse portfolio of assets that span multiple property sectors and locations
  • Pooled investment in Norfolk Mortgage Trust with a current loan-to-asset ratio of $43M:$100M
  • Investments secured by first registered mortgages

Norfolk Mortgage Trust prioritises the consistency and stability of returns, providing investors with confidence and peace of mind.

Choosing the Right Investment for you

To choose the right investment for you, you will need to consider how much risk you’re willing to take, and what your financial goals are.

One way to manage risk is to diversify your investment strategy. You can achieve this by choosing a mix of investments that vary in risk level or by selecting investments with built-in diversity.

When considering peer-to-peer lending, it is important to assess the associated risks. For example, if a loan is secured by shares in a single property, this may not offer enough diversification of risk. Do you have sufficient information, time, and experience to make an informed decision about the borrower?

Alternatively, would a professionally managed, actively diversified option like Norfolk Mortgage Trust be a better fit? By taking the time to understand your options and weighing the trade-off between risk and return, you can make informed investment decisions that align with your goals, time available, and your comfort level with risk.

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